May employers cut employee pay?
The short answer to the question is yes, with limits. As economic uncertainty continues, U.S. employers might be looking for ways to tighten budgets. While probably a last resort, cutting employees’ pay is an option.
FLSA rules
The federal Fair Labor Standards Act (FLSA) requires employers to pay nonexempt (“hourly”) employees at least minimum wage for all hours worked in a workweek.
If employees work overtime during a workweek, employers must pay them their regular rate of pay as well as overtime pay at a rate not less than one and one-half times the regular rate of pay for all overtime hours worked over 40.
The FLSA does not, however, prohibit employers from lowering employees’ hourly rate, provided the rate paid is at least the minimum wage. The FLSA also does not prohibit employers from reducing the number of hours an employee is scheduled to work.
Since 2009, the federal minimum wage level has remained at $7.25 per hour. Many cities and states, however, require higher minimum wage levels compared to federal, and employers are mandated to pay whichever amount is more beneficial to their employees in those areas.
Salaried/exempt employees
Employers may classify certain employees as exempt from the FLSA’s overtime and minimum wage provisions. One of the criteria employees must meet for employers to classify them as exempt (“salaried”) is that the employees must be paid the same salary for every week during which they do any work.
Reductions in the predetermined salary of an exempt employee will ordinarily cause a loss of the exemption. Employers must then pay those employees at least the federal minimum wage and overtime pay required by the FLSA. In some circumstances, however, an upcoming reduction in salary may not cause a loss of the exemption.
Employers may prospectively reduce an exempt employee’s predetermined salary during a business or economic slowdown, provided the change is bona fide and not used to evade the FLSA’s salary basis requirements.
A predetermined salary reduction unrelated to the quantity or quality of work performed, will not result in loss of the exemption, as long as the employer still pays the employee the FLSA minimum salary of at least $844 per week ($1,128 as of January 1, 2025). Some states have higher minimum salary thresholds.
If, on the other hand, employers make salary deductions caused by day-to-day or week-to-week business operating requirements, they risk losing the exemption.
The difference is that the first instance involves a future reduction in the regular salary to reflect the long-term business needs, rather than short-term, day-to-day, or week-to-week changes to business operations.
Just because employers may, doesn’t mean they should
The decision to cut wages and salaries shouldn’t be taken lightly. The ripple effect it could cause throughout the company might end up costing more in the end.
Reducing pay can negatively affect employees:
- Morale,
- Performance,
- Engagement, and
- Retention.
Negative news spreads quickly and can have a lingering influence on the company brand. This means filling open roles could become even more of a challenge if prospective employees think they won’t be compensated fairly or worse, have their pay cut.
Key to remember: Employers may cut employee's pay, but should do so only for the right reasons, considering the potential for lingering negative consequences.